This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

Reserve’s Bent Tells of ‘Throwing’ Things at Wall

Firm considered a reverse repurchase transaction in wake of Lehman's failure, Bent testifies.

Bruce R. Bent, chairman and cofounder of the Reserve Funds, said he and others were willing to “try anything” the day after Lehman Brothers Holdings Inc.’s bankruptcy caused a run on the $62.5 billion money-market fund.

Bent testified on the second day of a trial in the U.S. Securities and Exchange Commission’s case claiming he and his son Bruce Bent II defrauded investors by misleading them about the fund’s safety in the two days following Lehman’s failure.

Under questioning by SEC lawyer Nancy Brown, Bent said today his firm was exploring a reverse repurchase transaction to raise cash on Sept. 15, 2008, the day after Lehman filed for bankruptcy protection, in spite of a limitation against borrowing more than 5 percent of the fund’s assets.

The next day, Reserve became the first money market fund in 14 years to “break the buck,” meaning that the net asset value of its shares fell below $1.

Opening Statement

In her opening statement, Brown told jurors that the Bents lied on the morning after Lehman announced its bankruptcy, falsely telling investors, regulators and the fund’s trustees that they would use money from their firm, Reserve Management Co., to support the $1 net asset value.

The SEC sued in 2009. The commission seeks disgorgement of unspecified ill-gotten gains, a civil fine and an order barring the defendants from violating the securities laws in the future.

John Dellaportas, a lawyer for the Bents and the company, told jurors in his opening statement that his clients didn’t lie or defraud investors. He blamed the Lehman bankruptcy and an unprecedented freeze in the credit markets for Reserve’s failure. The Bents believed they would be able to raise money to maintain the $1 NAV and pay investors’ redemption requests, he said.

“The whole world changed between Monday and Tuesday, and the SEC says, ‘You’re lying,’” Dellaportas said.

U.S. District Judge Paul Gardephe told the jury he expects the trial will take three weeks. Bent’s testimony will continue tomorrow.

Among Gardephe’s pretrial rulings is one barring both sides from introducing evidence of how much investors lost in the fund’s collapse. The defendants had argued they should be permitted to introduce evidence demonstrating that investors recouped “most” of their investment after the fund’s collapse, demonstrating that “this is not a Madoff situation.”

Earlier in the day, Peter Rizzo, a senior director at the credit-rating company Standard & Poor’s, testified as a witness for the SEC. Rizzo said that Patrick Ledford, Reserve Management’s former chief investment officer, spoke to him on a recorded telephone call shortly after noon on Sept. 15, 2008.

“If our rating is yanked, then you know, that’s the kiss of death for us,” Ledford said, according to Rizzo. Ledford told Rizzo that the fund and the Bents “are going to look for funds” to help shore up the fund, adding, “I think we’re going to make it out OK, not great.”

The case is SEC v. Reserve Management Co., 09-cv-04346, U.S. District Court, Southern District of New York (Manhattan).

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.